Kumba positive on West Africa as market cools

[miningmx.com] – KOLOMELA, Kumba Iron Ore’s (Kumba’s) newly
commissioned R8.5bn iron ore mine in South Africa’s Northern Cape province, came
to the company’s rescue in the first half of its financial year.

The mine produced better-than-forecast output of 3.3 million tonnes (Mt) for the
period – enough to offset a production shortfall at Kumba’s Sishen mine, which
suffered the effects of absenteeism in the first quarter.

Anglo American announced this morning that it had raised its stake in Kumba 4.5%
to 69.7% at a cost of $950m. It had no other options outstanding to further increase
its holding, it said. Anglo bought the shares at R519/share. Kumba is currently
trading at R567.91/share.

Kumba’s CEO, Chris Griffith, also commented that the company’s exploration and
acquisition activities in west Africa, where it intended to establish “a second
footprint’, had been informed by “a return to normality’ as mining groups trimmed
their capital expenditure and exploration budgets amid a slow-down in China’s
economic growth, and sluggish economic conditions elsewhere on the globe.

Kumba produced 21.6Mt in the first six months of the financial year. Volumes were
assisted by mining from stockpiles, the company said. Griffith, who was presenting
Kumba’s results for the last time following his appointment as boss of Anglo
American Platinum (Amplats), said Kolomela was on course for production of 6Mt in
the 2012/13 financial year. Nameplate capacity is 9Mtpa.

“We won’t catch that production up again,’ said Griffith of Sishen’s performance. As
a result, total iron ore production was expected to fall in line with the previous year,
in which it produced 41.3Mt.

Commenting on the iron ore market, Griffith said it was in fairly robust shape,
although compared to the record prices of the second half of 2011, the perception
was that it was in climb-down mode.

The price of iron ore increased to $170/t during Kumba’s previous financial year. In
the first half of the current financial year, however, the realised price for Kumba’s
exports fell $35/t to $135/t. The iron ore price is currently at $125/t.

“There’s nothing about the long-term structural demand for steel that changes the
iron ore price outlook. $135/t is a decent price,’ Griffith said. “But we will have
volatility.’

China last week reported another slow-down in GDP growth coming in at 7.6% for
the second quarter. China’s metered control of its economy has spooked investors,
who have sold down mining equities while shareholders of major mining companies,
such as BHP Billiton, have pressurised management to focus on returns resulting in
a pull-back in capital expenditure.

This has raised the expectation that diversified mining houses will continue to pull
back on greenfield and expansion projects, particularly in so-called “frontier regions,’
of which west Africa’s iron ore fields is considered one.

On the topic of the company’s efforts to establish a second footprint in west Africa,
Griffith said, “There has been a return to normality on what is reasonable there [in
west Africa]. I think there was a process of people putting their footprint down. But
now it’s time to make commitments, it’s not looking as rosy.’ Griffith acknowledged
that there may be a greater proportion of value in the west Africa iron ore
exploration sector.

Speaking at the company’s results presentation in Johannesburg, Griffith added that
merger and acquisition activity was a growth option for the region. “But we won’t bet
the company. We would consider merger and acquisition activity and are looking at a
range of opportunities,’ he said.

“We would rather look at projects that didn’t max us out. There will be a range of
projects. We’ve seen some people [companies] pulling out, but we would like to keep
our powder dry,’ Griffith said.

Kumba has set itself a near-70% production increase in iron ore to 70Mtpa by 2019,
a strategy it said “remains intact’. Studies were in progress to establish a second
mining footprint in west Africa, the company said in its production and financial
statement announcement. Greenfields and acquisition opportunities were being
assessed. Earlier this week, Reuters reported that BHP Billiton intended to pull out of
its Mount Nimba iron ore project in Guinea. An analyst said it was “unlikely’ Anglo or
Kumba would bid for it.